Jorge Yulia was anxious to start the selection and testing of controls at Walley Real Estate Group, a company that specializes in unique coastal properties nestled along the Nova Scotia coastline. A charming collection of coastal communities dots the rocks along the Bay of Fundy. Chaz Walley brings years of talent and experience from being an executive in the marketing, technology and finance world to personally owning, renovating, aggregating and subdividing property. Along with investment analysis and extensive contract negotiation experience, clients are expertly represented in every transaction. Chaz imparts a sense of ease and joy to finding the perfect property for each client, making owning beach and coastal property a dream! Jorge had two main "big picture" objectives: to prevent or detect misstatements in the financial statements.
Jorge was concerned about the following issues:
1. Revenue recognition was the trickiest as many of the transactions took place over a year to complete. Partial payments and deposits are being made and have to be matched up with proper revenue recognition criteria.
2. The entertainment and promotional expenses were high and he was not sure how they compared to industry standards, although they appeared to be consistent with the Walley Real Estate Group's profile and the deep pockets of its clientele.
Required:
a) What are detective and preventive controls?
b) Can Jorge use these preventive and detective controls to help him resolve the two issues he is concerned about?
c) Which factors will Jorge have to consider when determining the "extent" of tests to be performed?
d) When would Jorge perform substantive testing of revenue?

Question

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The Answer of Jorge Yulia was anxious to start the selection and testing of controls at Walley Real Estate Group, a company that specializes in unique coastal properties nestled along the Nova Scotia coastline. A charming collection of coastal communities dots the rocks along the Bay of Fundy. Chaz Walley brings years of talent and experience from being an executive in the marketing, technology and finance world to personally owning, renovating, aggregating and subdividing property. Along with investment analysis and extensive contract negotiation experience, clients are expertly represented in every transaction. Chaz imparts a sense of ease and joy to finding the perfect property for each client, making owning beach and coastal property a dream! Jorge had two main "big picture" objectives: to prevent or detect misstatements in the financial statements.
Jorge was concerned about the following issues:
1. Revenue recognition was the trickiest as many of the transactions took place over a year to complete. Partial payments and deposits are being made and have to be matched up with proper revenue recognition criteria.
2. The entertainment and promotional expenses were high and he was not sure how they compared to industry standards, although they appeared to be consistent with the Walley Real Estate Group's profile and the deep pockets of its clientele.
Required:
a) What are detective and preventive controls?
b) Can Jorge use these preventive and detective controls to help him resolve the two issues he is concerned about?
c) Which factors will Jorge have to consider when determining the "extent" of tests to be performed?
d) When would Jorge perform substantive testing of revenue?

Jorge Yulia Was Anxious to Start the Selection and Testing